Madeleine Deaton/iStock Editorial via Getty Images Investment Thesis Sphere Entertainment Co. ( NYSE: SPHR ) is a premier live entertainment and media company. Recently, the company opened a new and highly anticipated Madison Square Garden (MSG) Entertainment Sphere in Las Vegas.
The groundbreaking venue is set to leverage and boost the entertainment industry in Las Vegas by offering the audience an unparalleled and immersive experience. The rationale for investment is simple: 1) The company has two distinguished revenue streams in which one provides stable cash flow whilst the other one, as a signature entertainment venue globally, has tremendous potential; 2) the company has an aggressive partnership strategy to attract and partner with prominent events, like F1 and famous singers; 3) strong management team, as exemplified by the 6% surge after the announcement of its CEO's contract extension . From all of these, it is a Strong Buy to me.
The two business segments Sphere operates through the business segments of Sphere and MSG Networks. Sphere: The sphere is located in Las Vegas and is the Company's next-generation entertainment venue. The Sphere was unveiled in September 2023 with 16,000 seat capacity and high-resolution LED screens among audio systems.
The Sphere infrastructure is planned to allow unparalleled live events, content creation, conferences, and concerts. The MSG Networks: MSG has entertainment networks and two regional sports broadcast live sports content focusing primarily on professional teams owned by MSG Entertainment, such as the New York Rangers and New York Knicks. Diversified revenue drivers From the company's latest earnings report , Sphere generates its revenue from: Live events: Hosting sports events, concerts, corporate events, award shows, and other entertainment experiences earn Sphere revenues from ticketing fees, merchandise sales, and concessions within the venue.
In Q3 2024, Sphere earned between $245 million to $256 million from 661,456 to 662,530 tickets. Content Creation: Sphere offers a unique stage for content production where creators and artists hire the venue to capture and develop high-quality content. Sphere receives rental fees and production partnerships.
In Q3 2024, Sphere experience was conducted 191 times, generating $167.8 million, where $14.1 was adjusted operation income.
Meanwhile, the MSG Networks segment generates its revenues from: Subscription fees: A significant portion of revenue generated from MSG Networks comes from satellite and cable subscriber fees. The fees are a stable and recurring source of income. Direct-to-Customer Streaming : MSG generates income from monthly subscriptions paid by viewers who watch by streaming the entertainment.
There is a huge number of subscribers within entertainment and regional sports networks. Advertising: MSG Networks generates income from advertising spots and other programs to offer target advertising for its brands during live broadcasts. Sphere segment as a catalyst for the stock Sphere Entertainment presents a positive and imminent business expansion with recent cash inflows after its opening.
The financial performance of Sphere Entertainment is an indication of a suitable share investment portfolio for listed shares. In the past 11 months, Sphere Entertainment shares have gained 65% since its launch. The Sphere is running a positive buzz narrative, demonstrated by the Q3 performance.
Since February, analysts, including Morgan Stanley and J.P Morgan initiated or downgraded the rating of the stock to Neutral with an expectation of Sphere to generate a loss of $4.31 per share on $1.
06 billion revenue and expecting the company to make a loss of $1.91 per share in Y2025. However, this has not affected the company's share performance despite the downgrade, as investors consider the $2.
3 billion project a long-term investment that can generate future cash flow and bring the company forward. Data by YCharts With the optimism around the concept of the Sphere bringing economic value to the company, the stock will gain further with the plans to build other Sphere in the rest of the world, which company CEO James Dolan has been positive about the potential investment. Sphere expects to spend less capita l to develop similar properties in other locations based on the experience of constructing Sphere Entertainment in Vegas.
Aggressive strategic partnership strategy The core of Sphere Entertainment is to establish a premier immersive and exclusive content creation platform. The 16,000-seat capacity facility adheres to the principle of "Content is King" to attract phenomenal live events and high-profile partnerships. Sphere has collaborated with U2 for their "Exosphere" residency show.
U2's partnership with Sphere illustrates Sphere's pursuit to make more business partnerships in the future. Additionally, Sphere strategically has extended beyond hosting live events to actively promoting Sphere as an ideal platform for filming song videos, movies, and other creative projects. These expectations are realized through its value in Vegas (with the large tourist and audience numbers) and potential expansion into other countries like the Middle East .
Las Vegas is expanding its events , such as the Super Bowl event hosted last year, 2023, and Last Fall, the Formula One Grand Prix, with more to come. Las Vegas is an upcoming tourist hub; Las Vegas offers a better location for expansion, with other crucial businesses around sphere construction set to kickstart. The FAA has given the Las Vegas Airport executives the green light to develop it in the desert outskirts.
FAA approval is a groundbreaking decision that will boot Las Vegas tourism. The NHL Draft will be the first. Sports events will be held in Las Vegas using an immersive experience venue.
The NHL Draft is expected to attract a lot of visitors. 3 News Las Vegas is the capital of the world entertainment. The essence of the premier sphere entertainment stage corresponds with the dazzling nightlife of Las Vegas, where multiple entertainment areas exist for a diverse range of interests.
Las Vegas gives value to Sphere through its already existing grandeur, which features luxurious accommodations, opulent designs, world-class restaurants, and multiple entertainment venues. The city has the most famous and iconic Entertainment center, the Las Vegas Strip, measuring a 4.2-mile stretch.
The construction of Sphere in Las Vegas presents the company with an existing entertainment business economy . Entertainment in Las Vegas is shifting from gaming and entertainment to hosting exhibitions, installations, and cultural events. In cities such as Riyadh, where cultural events are held numerous times and have excellent ticket sales, SPHR aims at Riyadh Season yearly events that attract over 10 million tourists worldwide to witness varied entertainment, sports, and art exhibitions.
Since the title Riyadh season has been used to sponsor the UFC306 event at Sphere, which, according to Dana, will be the biggest sports event in entertainment history, the eye is on whether the fight can be hosted in the Riyadh venue. UFC306 has so far created excitement, translated by the financial magnitude it has attracted to a record high of UFC306 $20 million in ticket sales. Sphere is likely to get a cut of 10%, which is $2 million.
Additionally, the Sphere will attract revenue from the sale of UFC306 Suites at 250k each, making $3.5 million, and the sale of food and beverages for 5 hours, making approximately $1.2 million, and rent charges to the Sphere facility, which ranges between $1.
5 - $2 million per day making $1.2 million. Dana stated that $17 million was channeled toward production, and UFC will earn back $1 million plus the sale of ads at $2 Million.
There, UFC306 is likely to profit $11 million per day. The sale of tickets will be transacted by StubHub, with the lowest sale at $2,000 per ticket. The information leaked about Abu Dhabi making the forefront of negotiations before Riyadh confirmed the pressure of negotiations.
The two cities, Abu Dhabi and Riyadh are run independently; a common interest in entertainment property will likely materialize in constructing the second Sphere in one of the cities. Flagship contracts and events U2 Residency - Sphere has contracted with The Iconic Band U2- 12 show residency. Considering the premier experience at Sphere, the tickets were priced higher, between $462 and $1,400.
The contract between Sphere and U2 required 40 concerts from September 29th, 2023, to 2nd March 2024 . Every concert generated an average of $4 million from Live Nation. In total, the Sphere generated a revenue of $244.
5 million . Postcard from Earth contract - Darren Aronofsky, a filmmaker, made a contract with Sphere to create unique immersive experience films. So far, there have been 111 showings of Aronosky's Postcard .
Sphere Entertainment made $44.5 million in revenues from "Postcard from Earth" showings. Strengths of Sphere: " Content is King " experience.
The "Content is King" plan is a strategy scheduled at the premier platform to create unique and high-pixel content . Sphere seeks to attract more filmmakers, artists, and creators, boosting its revenue generation and prestige through potential co-productions and content creation. Diversifying Revenue Streams: Renting Sphere Platform for content creation and partnerships with technology companies continue to reduce licensing fees relatively.
Also, the concessions and highlighting of the merchandise, which are particular to the immersive experience, offer a more diverse revenue stream. Building a Sphere brand based on buzz-worthy and innovative events. The strategy of Sphere is to enhance a must-visit destination narrative for live entertainment.
The cutting-edge technology has created a phenomenon property completely different from its competitors. The partnership between high-profile artists has driven an exciting narrative in the area as well. The prolonged plan to improve Sphere entertainment strategies has boosted its revenue generation from multiple income streams apart from tickets.
There is an enhanced appeal for the audience who derive a unique kind of entertainment such as an immersive experience. Valuation In assessing the fair value of the company, since the two business segments have their own respective business nature and maturity, we used a "Sum of the Parts" valuation method to value each segment with their peers and business growth. Image created by the author For Sphere, we applied a 2 - 3.
5x revenue growth since the event contracts and partnerships are gradually growing as discussed, while the MSG network with grow at a slower pace at low double-digit annual growth - as supported by market growth prediction . Applying different EV/Revenue ratios for each of these two segments can allow us to reach a more appropriate fair value for the stock. The rationale for the multiple assumptions will be explained below.
By taking the average of the "sums" and also the estimation from the overall EV/EBITDA ratio of an entertainment business, the final target price is between $54 to $77, which represents a 20-70% upside. Hence, we give the company a Strong Buy rating. Multiple comparison for Sphere Data by YCharts Liberty Media and MSG stocks were selected for ratio comparison as they are in similar business models in the entertainment industry with stadiums and properties.
The EV/Revenue multiple of these two mature businesses range from 4.5 - 5.7.
With Sphere in Las Vegas being a new venue with potential to be realized, we adjusted upward the multiple to be used for Sphere to reflect this. Multiple comparison for MSG Data by YCharts Involved in the sports broadcasting business, the closest businesses to the SMG network are selected, namely Live Nation Entertainment and Fox. Therefore, the multiples will also be used for the valuation.
Multiple comparison for overall business Data by YCharts The high end of Sphere's EV/EBITDA ratio may come close to its parent company MSGS, which is higher than other peers, since the company may be valued with a similar rationale as its parent company. In the lower end, we used the average of the rest of the peers such as Formula One. Investment risks Capital intensive: The construction of Sphere, despite being an important revenue-generating asset, requires a lot of capital input.
The current ratio of the company is below 1, and the company has more than $1.3 billion in debt. Therefore, the company's development is limited by its ability to secure financing and is also affected by interest rates.
Macroeconomy: The economic downturn in the recent 2 years will surely affect tourism and therefore the entertainment industry that Sphere operates in. Target markets like the US and Europe are experiencing higher inflation, which will reduce customer spending. Expansion into the Middle East could be a good mitigation strategy Intense competition: Although it might be difficult to replicate and reproduce Sphere, the signature venue, good venue exhibition, and entertainment companies are not uncommon in the current market.
Customers and partners may opt for a more economic option given the macroeconomy as discussed. Conclusion Sphere Entertainment is a good investment story with its strong foundation in the entertainment industry and also its signature venue that uses groundbreaking technology and immersive experience, positioning itself as a global entertainment conglomerate. Despite analyst rating being cautious, the stock's 65% gain in the past year has indicated market optimism for its long-term potential.
We maintain a Strong Buy rating since continued growth can be expected when Sphere expands globally and capitalizes on Las Vegas's entertainment ecosystem. Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions.
I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results.
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